There is nothing wrong with compensation packages including bonuses. But it is very hard to justify a compensation system that grants merit pay to executives of companies that would otherwise be insolvent without taxpayer bailouts.

Freddie Mac announced Thursday that it saw losses of $4.4 billion in the third quarter of 2011 and was short $6 billion total at the end of September. If Freddie was any other company, they would be brought before the FDIC, a bankruptcy judge, or taken through the new resolution authority process and shut down. But instead, taxpayers are forking over $6 billion to cover those losses.

In total, Freddie Mac has received $71.2 billion in bailout money from the U.S. Treasury since FHFA took the GSE into conservatorship in late August 2008. Here is the most recent breakdown:

3Q 2011 — $6 billion

2Q 2011 — $1.5 billion

1Q 2011 — $0

4Q 2010 — $0.5 billion

3Q 2010 — $0.1 billion

2Q 2010 — $1.8 billion

1Q 2010 — $10.6 billion

4Q 2009 — $0

3Q 2009 — $0

2Q 2009 — $0

1Q 2009 — $6.1 billion

4Q 2008 — $30.8 billion

3Q 2008 — $13.8 billion

Total Freddie Mac losses so far: $71.2 billion. The total Fannie Mae bailout so far is $103.8 billion, but their third-quarter earnings come out next week and that number is estimated to jump by $10 billion more. So pending next week's Fannie Mae numbers, the total taxpayer bailout for Fannie and Freddie's failures to set responsible underwriting standards, make wise investment decisions, and hedge risk properly is $180 billion. The FHFA now estimates that number won't rise higher than $311 billion, though that is hardly a comfort.

And with all the talk of refinancing programs and attempts to force principal reductions, the losses could be higher since the investors in the mortgages that would be changed in those circumstances wind up losing revenue on every refi and reduction—just remember the taxpayers are now the investors in the millions of mortgages owned or guaranteed payment by the GSEs.

Things do not look much prettier when headlines show up about $12.9 million in bonuses for the executives of the GSEs.

Now, before we go running off with pitchforks and torches, in context the bonuses are modest. They are legal. And they were approved by a guy (Ed DeMarco) who has been effective in standing up against the administration trying to use the GSEs to fully implement its housing agenda which would involve principal reductions and even higher losses to taxpayers.

So the decision should not be seen as Washington back door payments to friends. Rather, DeMarco is just following what the law and conservatorship agreements tell him to do. He is not trying to set policy.

The problem is that the conservatorship agreement allows for millions in bonus pay in the first place. If a company can not survive without taxpayer bailouts, its executives should not be receiving merit pay—even if the losses were caused by actions made by previous executives.

The problem is not necessarily that the bonuses were over a million—that is just a headline grabber appealing to the subjective tendencies of the population at large. Who is to say what a large mortgage company executives shuold make in normal times. Certainly not mass public opinion. The shareholders should make that call.

The thing is, though, that we are the shareholders of Fannie Mae and Freddie Mac. Without the public money to support the GSEs, they'd be goners. So we do have a right to dictate their compensation.

Though it should be in the law, not something we just hope that Ed DeMarco does in his role as regulator. Back in April, the House Subcommittee on Capital Markets and GSEs passed a bill that would put the staff of the GSEs on the federal pay scale, an idea that we recommended in February testimony before the same committee.

There will be complaints about needing to keep the best talent at the GSEs, and understandably so because there will be plenty of people who won't want to work for the GSEs without making the hundreds of thousands and (in the case of the top executives) millions they make now. In the private sector this is absolutely a concern, which is why we have argued that the government should not be dictating compensation terms to private companies (unless they have been bailed out and the compensation limitations are accepted along with the bailout money willingly). But Ginnie Mae is able to operate at the same level as Fannie and Freddie and their staff are paid by the federal pay limits. There really is no good reason to not have the GSEs on the federal pay scale (dictated by law) for as long as they are still around—which shouldn't be much longer anyway.

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